Clarity

Clarity

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Clarity at last! A new owner is not responsible for the municipal debt of the previous owner10 October 2017 “I’ve been following the running debate in the media over the last few years about whether the municipality can hold a new owner responsible for the municipal debts of the previous owner. I understand now that the matter has been decided on by the Constitutional Court. But is it really resolved?”

You are correct to note that the matter has been the topic of a lot of media exposure as several of our courts have had a stab at interpreting the provisions of section 118 of the Local Government Municipal Systems Act 32 of 2000 (“Systems Act”).

Section 118(3) of the Systems Act has been a great cause of concern for home owners, as this section has been viewed as enabling a municipality to hold a new home owner responsible for the arrear municipal debts of a previous owner. According to this section, an amount due for municipal service fees, property rates and other municipal taxes, levies, etc, is a charge upon the property and enjoys preference over any mortgage bond registered against the property, thereby creating a security provision in favor of the municipality for the payment of the outstanding debts. No time limit is attached to this provision and it does not matter when the secured debt became due.

Last year, the Gauteng High Court (Pretoria) declared section 118(3) constitutionally invalid. Following this, the Constitutional Court in Jordaan and Others v City of Tshwane Metropolitan Municipality and Others recently had to consider the meaning and constitutionality of this particular subsection. The Constitutional Court concluded that a new owner is not liable for the previous owner’s historical municipal debts arising before transfer of the property.

The Court noted that section 118(3) does not require the charge against the property to be either registered or noted at the Registrar of Deeds. There is no indication that the right given to the municipalities has an effect on third-parties. Further, there is no provision to fulfil the publicity requirement which is central to the functioning of limited real rights. The section stands alone, unsupported and with no express wording holding any suggestion that it is transmissible.

In contrast, the court looked at the Land and Agricultural Development Bank Act 15 of 2002 which was enacted soon after section 118(3) took effect. This statute provides specifically that before the Bank makes any payment of a loan, it must convey in writing to the Registrar of Deeds information about the advance which includes the amount due and the date. The Registrar makes a note in its registers and endorses the title deed of the property to that effect. This note creates a charge upon the property in favour of the Bank until the amount of the advance together with interest and costs has been paid.

Section 118(3), however, does not attempt to establish a similar publicity requirement in order to have the rights enforceable against third parties. The two provisions use the same language but the Land and Agricultural Development Bank Act holds the logical outcome that secures transmissibility, namely registration by public act in the register of deeds.

When legislation creates a transmissible charge upon immovable property, registration in the deeds registry is required. Its absence from section 118(3) provides a clear indication that the charge takes effect only against the current owner and not their successors.

The Court further considered that the Bill of Rights in the Constitution prohibits arbitrary dispossession of property, which would happen if debts without historical limit are imposed on a new owner. To avoid unjustified arbitrariness in violation of section 25(1) of the Constitution, the Court held that section 118(3) of the Systems Act must be interpreted so that the charge it imposes does not survive transfer to a new owner.

The Constitutional Court therefore found that section 118(3) is not unconstitutional and that it should be interpreted so that the charge does not survive transfer to the new owner and thereby confirmed that, upon transfer of a property, a new owner is not liable for debts arising before transfer from the charge upon the property under section 118(3). By so doing, our highest court finally confirmed the position and provided much needed legal certainty on the matter.

municipal debt

municipal debt

According to Section 118(1) of the MSA, a property may not be transferred unless a rates clearance certificate has been issued by the municipality where the property is situated. The certificate must certify that all amounts due to the municipality for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties (“municipal fees”) during the two years preceding the date of application for the certificate have been fully paid. This subsection says nothing about historical arrears which may be older than two years.

According to Section 118(3) an amount due for municipal fees is a charge upon the property and enjoys preference over any mortgage bond registered against the property, thereby creating a security provision in favour of the municipality for the payment of the outstanding debts. No time limit is attached to this provision and it does not matter when the secured debt became due. It can include debts up to 30 years old (for rates, refuse and sewer charges) and 3 years old (for electricity and water), including debts of more than one previous owner, all of which are secured through Section 118(3) in favour of the municipality.

The issue that is the cause of the consternation is where a new (innocent) owner is now held responsible for municipal debts older than two years incurred by previous owners, without any prior knowledge that there is arrear debt and that municipalities may, as in your case, hold the new owner responsible for the arrear debt of someone else. The new owner is caught by surprise, particularly as a rates clearance certificate was issued creating the impression (even if not legally correct) that all debts with the municipality have been settled by the seller.

Our Supreme Court of Appeal has recently confirmed that a rates clearance certificate does not mean that there is no further municipal debt tied to a property. Our courts also confirmed that if the seller or previous seller is unable to pay or cannot be located, the purchaser or new owner will be held liable for these debts, in extreme cases even potentially allowing the municipality to sell the property itself to settle the arrear debts. This right (or hypothec) of the municipality over the property established by Section 118(3) thus survives any form of property transfer without exception.

Based on this court decision, it potentially leaves a new owner vulnerable to the municipality enforcing its rights over the property, even resorting to disconnecting water and electricity to force a new owner to settle arrear municipal debts.

Our courts have not however had occasion to test the constitutionality of Section 118 of the MSA, and in our view there could be constitutional grounds for testing the fairness of the current interpretation of Section 118(3) and the application thereof by municipalities.

We accordingly recommend that should the municipality persist in your case to require settlement of a previous owner’s arrear municipal debts or face disconnection of municipal services, you should approach a legal advisor for assistance.